Sunday, January 10, 2010

London prepares to "hoist with own petard."

There is irony in this Daily Telegraph article about a pending skirmish between London's boy-wonder Mayor, Boris Johnson, and Labour's Treasury Select Committee, a.k.a., the taxmen. As the financial downturn has crushed major western financial centers like New York, London, Hong Kong, Chicago, Geneva, and Zurich, governments have experienced sharp reductions in tax revenues as jobs vanished. It's the natural order of things. However, this clash between Johnson and the taxmen could have some interesting implications for the full recovery of London.

The taxmen want to target wealthy bankers, by imposing a windfall tax of 50% on bonuses in excess of £25,000(about $44,800). While this is estimated to impact between 9,000-10,000 bankers in London, the long-term impact could be devastating to London's financial service sector recovery. Dropping aside the odious elements of class warfare and populist exploitation that are partially fueling Labour's rationale, the werewolf is shocked that the British government is seriously picking a fight on this issue. This sends a clear signal to all financial service employers that the British government isn't serious about recovery and could potentially prolong London's downturn by compelling bankers to do business somewhere else. Recall, that London's primary business is financial services. (Could you imagine Hollywood taxing all actors an extra 50%) Is the deliberate hamstringing of your long term prospects worth a brief spike in revenue collection? For the werewolf, it boils down to the alignment of long-term versus short-term incentives. The self destructive desire to score short term points by destroying long term prospects, leaves him completely flummoxed. London is slaughtering the cow for a sirloin tonight, but is forgetting it will lose the cow's precious milk flow, and it'll be thirsty for a long time to come.

He feels that for too long, most decisions have been predicated on short-term considerations, including those decisions that laid the foundation for the current financial predicament. When leadership jobs vanish, they are hard, if not impossible to recreate. If there is a further exodus of London's bankers to New York, Hong Kong, Zurich, or wherever, a decent amount of capital will have been committed to locating personnel in those new locales, thus increasing costs for a potential return to London. A bad cycle will have been initiated. Wouldn't this be the time to make London as attractive as ever, to retain it's position as a pack leader in financial services? Because whoever makes it to the top of the mountain tomorrow, will fight to retain their perch.

Three cheers to Mayor Johnson for looking at the long-term and thinking about London's tomorrow, rather than trying to fight yesterday's class war. Here's to hoping that long-term thinking returns to the decision making process sometime soon. The werewolf doesn't want to be in exile forever.

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